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Lessee enters into a four-year lease of equipment and concludes that the agreement is a...

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Accounting

  1. Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance lease because the leasecontains an option for Lessee to purchase the equipment at the end of the lease and the Lessee is reasonably certain to exercise that option. The arrangement provides the following:
Lease term Four years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter
Annual payments, beginning at lease commencement and annually thereafter

Commencement $50,000 Year 2 $53,000

Year 3 $56,000 Year4 -- $60,000
Discount rate 4.5%
PV of lease payments $204,577

Complete the following schedule to show the impact on the income statement and balance sheet.

Initial Year 1 Year 2 Year 3 Year 4
Cash lease payments
Income statement:
Lease expense recognized:
Interest expense
Amortization expense
Total periodic expense
Balance sheet:
ROU asset
Lease liability

  • Prepare the journal entries at the time of the lease commencement and for Year 1 of the lease term.

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